PRM/U4 Topic 6 Significance of Wage Differentials

Wage differential is a term used in labour economics to analyze the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A compensating differential, which is also called a compensating wage differential or an equalizing difference, is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform. One can also speak of the compensating differential for an especially desirable job, or one that provides special benefits, but in this case the differential would be negative: that is, a given worker would be willing to accept a lower wage for an especially desirable job, relative to other jobs.

The idea of compensating differentials has been used to analyze issues such as the risk of future unemployment, the risk of injury, the risk of unsafe intercourse, the monetary value workers place on their own lives, and in explaining geographical wage differentials.

Wage Differentials – Types and Implications

If we take various contingent factors into account, we find that there may be differences in wage and salary structures. These differentials may be industrial and occupational, regional, organisational and personal.

Industrial and Occupational Differentials: Industrial and occupational differentials exist because of requirement of different skill set and imbalance in demand and supply of personnel having such skills. Wages and salaries are usually fixed on the basis of skills required to perform a job. Thus, highly specialized jobs requiring higher level of skills are linked with higher pay too. Coupled with this, shortage of supply of such personnel also induces the payment of higher pay.

Regional Differentials: Apart from industrial arid occupational differentials, there may be differences in wages and salaries region-wise also within the same industry and occupation group. Such differences are visible in different countries of the world as well as different regions within a country. Such differences exist because of the differences in cost of living pace of industrial development and lack of adequate mobility of personnel from one region to another. For example, wages and salaries are higher in metropolitan cities as compared to other cities; higher in cities as compared to rural areas.

Organisational Differentials: Different organisations falling in the same industry group and at the same location offer different wages and salaries to individuals having similar background. The main reasons for organisational differentials are organisations policy to recruit specific types of personnel and their capacity to pay. For example, most of the multinational organisations operating in India offer much higher salaries to their employees as compared to their counterparts of Indian origin. Similarly, larger organisations offer much higher salaries as compared to smaller organisations.

Personal Differentials: Wage and salary differentials exist at personal level too. Different persons having similar qualifications are offered different salaries in the same organisations. This happens because they have acquired different skills in spite of the fact that they may have similar educational background. This happens more so when skill-based pay system is adopted as against job based pay.

Implications of Wage Differentials

Wage differentials have a number of implications both at macro and micro levels.

At the macro level, these differentials determine the allocation of human resources and non-human resources. This allocation determines the growth pattern in the economic system. When a particular industry or occupation offers higher wages and salaries, the economic resources are geared to develop such personnel. For example, in India, educational activities have increased in the areas of management and information technology because these areas offer higher salaries and better job opportunities.

At the micro level, wage differentials show that some organisations use proactive strategy to attract better talents as compared to others. They become trend-setters rather than play the role of followers. These trend-setters set pattern not only in relation to recruitment of better personnel but in terms of other human resource management practices too.